UK economic outlook

 

 

As the gloom of 2008’s dramatic changes in the UK and world economies are now a few months behind us, what are the prospects for 2009?  It’s fair to say, that even at the end of December last year, most predictions for the next 12 months featured further hardship, GDP reduction, unemployment increases and escalating insolvency levels.  In addition, the scale of the figures makes for even more sobering reading.

UK GDP dropped by 1.5% during the fourth quarter of 2008 prompting the IMF to revise its forecast for the UK economy downwards from 1.3%, predicting a reduction of 2.8% in 2009. 

Unemployment rocketed to almost two million by mid February, undoubtedly fuelled by failure of several major retail chains as they accounted for a significant number of individual stores. The failure of closure of Woolworth resulted in the loss of 27000 jobs, alone. 

The close correlation of this economic performance to insolvency trends, inevitably leads to an escalation of business failures across all sectors, with the latest figures showing an increase of 51% by the last quarter of 2008 compared to the same period a year earlier.  Clearly, further deterioration in the GDP, would have a high impact on insolvencies through 2009.

At the core of the outlook for 2009 and into 2010 is the persistent lack of credit for business which will be partially alleviated, by the extent to which the banks will begin inter-bank lending again.  The lack of credit and the inability of businesses to raise capital are already having a detrimental effect on investment plans, which are being cut back.  Significant changes in employment plans are also a feature.  This scaling back of investment and labour has prompted the CBI, among others, to predict unemployment to reach around 3 million by the end of 2009.

Clearly, these factors have an impact on the already low levels of consumer spending as unemployment offsets the benefits that might have been gained as a result of the recent falls in commodity and energy prices, which have produced a sharp fall in inflation.

Low consumer confidence, further dented by the poor housing market and price drops of averaging 1.35% per month, also promotes savings rather than spending, which is expected to fall by 1.8% in 2009, considerably more than the 0.3% previously expected.  The combined fall in investment and consumer spending pattern paints a very poor picture for domestic demand, which is expected to be 2% lower than the peak at the end of 2007.

It is widely accepted that these are uncertain times and making long term forecasts with any precision is exceptionally difficult, as has been proven over the past 6 months where the constantly changing environment has shortened the useful life of most forecasts. Clearly the credit market is a core catalyst for change in business environments, but it is also one of areas of greatest uncertainty.  The bank rescue package coupled with government stimulus for business is expected to have a positive impact as their effects filter into the credit markets and inter-bank market. 

However, if this does not materialise in the first half of 2009, then the prospects for an even deeper recession increase considerably. To date, the total cost of the governments, rescue plans amounts to £964bn* comprising asset protection schemes, bank debt guarantees, Bank of England (BoE) loans, corporate debt schemes, bank bailouts and a working capital fund for small businesses.  

So where will it end? Most commentators place the key to easing the credit crisis and the corresponding impact on businesses and consumers with the banks and their ability or desire to lend to each other.  This is already being stimulated by the government and BoE interventions together with some more direct support for business.  The tough conditions are likely to continue until the end of the year, although the size and depth of the recession will be largely dependent on the banks and the effectiveness of the current stimulus measures.

In good times or bad, sound advice, useful information and expert input can help you avoid risks and enable you manage your business more effectively.

*source: BBC

 

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